National or Regional Currency: Pakistani Rupee, PKR
Population: 174,578,558 (July 2009 est.)
Area: total: 796,095 sq km
Status: 27th largest economy in the world in terms of purchasing power, and the 45th largest in absolute dollar terms.

Wednesday, March 30, 2011

The missing taxpayers

The missing taxpayers
They travel abroad regularly, live in palatial homes and drive luxury vehicles. They are 2.3-million strong – they are the affluent Pakistanis who are also distinguished because they do not pay any taxes. They don’t even have a tax number, which suggests that these 2.3 million affluent Pakistanis have never paid taxes in Pakistan.

This is about to change, if one were to believe Salman Siddiqui, Chairman of the Pakistan’s Federal Bureau of Revenue (FBR). The FBR has issued notices to the 700,000 wealthiest of the 2.3 million affluent Pakistanis to pony up withheld taxes. Mr. Siddiqui did not elaborate on the penalties for those who would continue to evade taxes.

Tax evasion in Pakistan leaves the State with no option but to borrow money from lenders, such as the IMF. Consider this: in a nation of 180 million, fewer than two million are registered tax payers. Furthermore, tax revenue accounts for roughly 10 per cent of Pakistan’s GDP, which is extremely low even for Pakistan. The average among western European states is around 30-plus per cent. In neighbouring India, tax revenue accounts for 18 per cent of the GDP, which makes me wonder whether Indians have a better sense of citizenship than Pakistanis.
In the words of the famous Canadian-born economist, John K. Galbraith, this leads to the classic case of “private opulence and public squalor” where the desire and demand for private goods is enhanced while spending on public utilities such as schools and parks decreases. In fact, Pakistan’s society and economy epitomises private opulence and public squalor where the fortunes of the rich and wealthy keep growing, while the State of Pakistan gets buried deeper in domestic and international debt.

The FBR has to squeeze hard these bloated tax-evading lemons. I would argue that even the sovereignty of Pakistan rests on the unpaid taxes of these 2.3 million affluent citizens. Consider the following numbers: if the very rich tax evaders are charged a nominal annual tax of $2,500, and the remaining 1.6 million not-so-wealthy evaders are charged $1,500 annually, this would generate an additional $4.2 billion in tax revenue.
Remember that the US is offering Pakistan annually $1.5 billion (in aid) through the Kerry Lugar Bill, in exchange for drone attacks on its own people. The $4.2 billion from the wealthiest tax-evaders could buy Pakistan its freedom from the United States.

And what of the tax penalty for avoiding taxes in the past? May I recommend a one-time penalty, $5,000 for the very rich and $2,500 for the second-tier rich, which would generate a one-time revenue of $7.5 billion. This is exactly the amount that the Kerry-Lugar Bill has promised for Pakistan over 5 years. Again the very rich, by paying their back taxes as one-time penalty, can off-set Pakistan’s dependence on American assistance.

The amounts I have suggested in taxes are not excessive by any account. It was only last month when we learnt that renowned Pakistani singer, Rahat Fateh Ali Khan was caught with undeclared $124,000 in cash at the New Delhi airport. Rahat Fateh Ali Khan reportedly has no tax history in Pakistan. Would people like him find a few thousand dollars in taxes, burdensome?

Asking the very rich in Pakistan (who make several trips abroad for which the airfare of a single trip alone is around $1,500) to dole out $2,500 (or $1,500) in taxes is certainly not excessive. If you consider the equity they hold in their palatial homes or the luxury vehicles they drive, the amount I have suggested in taxes would appear insignificant for the very rich.

I live in a middle-class neighbourhood in Toronto, Canada, where I pay over $5,500 in property tax alone. My total tax bill (income and other consumption taxes) is an order of magnitude higher than my property tax bill. In fact, in Canada income taxes are the largest single line item in a household’s budget, followed by shelter and transport costs.

Canadians pay taxes even when they disagree with how the government spends their tax dollars. Consider the current right-wing government of Prime Minister Stephen Harper that has followed a more fear-laden agenda and has shifted towards spending on building prisons and buying fighter jets from the United States. Most Canadians abhor such spending decisions because Canada has experienced a significant decline in violent crime rate over the past decade and hence, does not need new prisons. Furthermore, Canada does not face any security threats from other countries for which it may need new fighter jets. Building prisons and buying fighter jets seems a huge waste of tax-payers’ dollars. Yet, I and other Canadians do not even for a second think of withholding taxes on the pretext that our tax dollars may be wasted on futile projects.

The relationship between the State and the citizen is defined by the citizen’s willingness to pay taxes. Withholding taxes weakens the State. A weakened State has no alternative but to compromise. In Pakistan’s case, it is not the politicians alone who have pushed the State to beg from the IMF or the United States. Instead, it is the citizens of Pakistan who refuse to buy a stake in the country’s future by paying taxes, have forced the State to borrow from IMF and other lenders.

All Pakistanis, irrespective of their political or religious persuasions, hate their country’s dependence on handouts from the United States, the IMF, the World Bank and other similar institutions. The easiest and surest way to break free of this economic dependency is for Pakistanis to pay their taxes.